March CPI has hit the tape and gone. Hottest headline prints for any one month since December 1981. I enlisted the month prior. My, how time flies. 1981. Year of the strike driven, split MLB season. Year that Boeing's (BA) 767 jetliner made its first flight. Year that unsuccessful attempts were made to assassinate both President Ronald Reagan and Pope John Paul II, wounding both leaders. Year the Lockheed Martin's (LMT) F-117 Stealth Fighter took flight for the first time. The F-117 was retired back in 2008. That's 14 years ago, Yup... time flies.
About that inflation though. The headline print hit the tape at 8.5%, precisely upon our expectation here at Market Recon. The core rate printed at growth of 6.5%, one tick below our projection. There are a few real takeaways that may or may not offer consumers some comfort. First, monthly headline growth of 1.2% comes on top of February's 0.8% that came on top of January's 0.6%. Hot and getting hotter. However, core monthly growth printed at a very manageable 0.3% on top of February's 0.5% and January's 0.6%. Lukewarm, and getting cooler. Remember, we had long ago, prior to being proven wrong (transitorily), projected that March 2022 would be the first month of noticeable deceleration in consumer level inflation. For obvious reasons pointed out in Tuesday's Market Recon, April now becomes this economy's best chance for such a trend change in price discovery on Main Street.
While the March headline data was dominated by energy prices... up 11% m/m and up 32% y/y, with fuel oil (up 22.3% m/m, up 70.1% y/y) particularly terrifying, some core items that had been driven much higher by both pandemic and supply chain impacts, have started to reverse. Used cars, still up 35.3% year over year, saw prices contract 3.8% month over month, a second monthly contraction in a row for used vehicles. Non food & energy commodities printed -0.4% m/m. New vehicles increased "just" 0.2% for the month on top of 0.3% in February, which came on top of a flat (0.0%) print for January. Shelter? Up 0.5% for the month, up 5.0% over last year. Both well below trend.
So, has the worm turned? Or is that worm at least turning? Who can say for sure. It would be nice to see my opinion as an economist somewhat vindicated, but that's not what this is about. This is about getting from point A to point B without getting your face ripped off. Of course, food and energy prices will react to shortages created through both pandemic and warfare and there will be no quick, nor easy remedy that can neatly tuck those problems away in some closet somewhere. The nation and the world must now pay the price for overdependence upon a globalized economy. The benefits were broad, as was the cost in terms of developed world middle class opportunity. The unwind, which will only be partial, will not be cheap.
Federal Reserve Gov. Lael Brainard spoke at the Wall Street Journal Jobs Summit on Tuesday. Remember her? Brainard for those who do not follow the Fed closely is the dove turned hawk that turned financial markets on their collective ear last week as she flipped her position on the trajectory of forward looking monetary policy. Brainard, by the way... has been nominated by President Biden to the vacant post of Fed Vice Chair and awaits Senate confirmation.
On Tuesday, Brainard said: "Inflation is too high, and getting inflation down is going to be our most important task." Okay, we're with you. Brainard also said that core prices deserve more focus because the core "most closely reflects the strength of domestic demand." Well, that and I don't know how much the Fed can do about Putin's invasion and destruction of the Ukrainian breadbasket, global sanctions against Russia for doing so, and Covid lockdowns in China. Better to stay in your lane, I guess.
Getting down to business, Brainard sees the Fed continuing to raise short-term rates, while acknowledging that quantitative tightening (letting the air out of the balance sheet balloon) is likely to be announced in May and then kick off in June. I don't know. Call me kooky, but why not start the music in May? You do want to get the ball rolling and you do know that the political will to correct both fiscal and monetary excesses of our semi-recent to recent past will evaporate as soon the electorate starts to feel the pain. Right now, tightening is cool only because inflation is a new phenomenon to everyone less than middle-aged.
As the address dragged on, Brainard expresses a lack of confidence due to uncertainty driven by forces outside of the Fed's control, which at this time, I think is quite understandable. However, I do think she expresses almost too much confidence in US labor markets. At one point, Brainard said...
"The US economy enters this period of elevated uncertainty with a very strong labor market and significant underlying momentum... and that, I think bodes well for the ability to bring inflation down while also continuing to sustain the recovery. There's quite a bit of capacity for labor demand to moderate among businesses by actually reducing job openings without necessitating high levels of layoffs."
Read that quote again if you have to. Talk about confidence in being able to thread a needle. Confidence, or is it a lack of real-world private sector entrepreneurial or management experience? Not taking a shot here. Really, I am not. Brainard's academic career is truly impressive, but I was raised in the school of hard knocks and I have been around the block a few times. It does not take much at all for employers to go from "help wanted" to "there's no money for that" and as these employers find the credit environment more difficult and expensive, both hiring and wage growth will slow. That's what economists like Brainard want right now. Can they land this craft without damaging payrolls? Hats off if they can.
"There's no time to lose" I heard her say
Catch your dreams before they slip away
Dying all the time
Lose your dreams and you will lose your mind
Ain't life unkind?
- Richards, Jagger (The Rolling Stones), 1967
Was it inflation? Was it Brainard? Was it Putin? Whatever it was, equity markets opened on strength, and then gave it all back and more by afternoon. This while bond traders brought up the entire yield curve, which managed to steepen through it all. The US Ten Year Note paid as much as 2.83% early on Tuesday and as little as 2.68% late Tuesday. The Two Year? As much as 2.55% early on, and as little as 2.38% at the trough (apex for pricing). The spread between the two expanded to 33 basis points by quitting time...
Though yields have climbed overnight, that spread remains largely intact. Turning to the wonderful world of equities, the S&P 500 gave up 0.34% for the session after having been up 1.3%. The index closed below its own 50 day SMA for the second day in a row, but this time also closed below 4400.
The Nasdaq Composite also gave up 0.3% for the day, after trading as much as 2% higher. The tragedy of the Nasdaq Composite is not just that this index has also closed below its 50 day SMA for not two but three consecutive sessions, but has not made contact with that line at all for two straight days.
What do you see on Tuesday for both of these indexes? A two to three week selloff? No kidding. I mean yesterday. Both the S&P 500 and Nasdaq Composite experienced a Tuesday trading range that completely enveloped that of Monday. A little exploration finds that the same two day condition exists for the Nasdaq 100, S&P Midcap 400, and Philadelphia Semiconductor Index.
However, taking a second look at the Nasdaq Composite (or Nasdaq 100, or Midcap 400, or Phily Semiconductor Index), the trader also notices that the range of the open and close on Tuesday also enveloped the range of the open and close on Monday. That's called a true "Outside Day", and for the Nasdaq Composite at least, it came on higher trading volume.
I see that equity index futures are trading higher through the wee hours. Understand this. An "Outside Day" that occurs on increased trading volume is seen as a sign of increasing volatility. It is also seen as a pattern of continuance. The recent trend has been to the downside. Not that all technical signals work every time, but the Nasdaq Composite is telling us that it's not done getting crazy and the general direction is still lower.
That said... we'll take that chart of the Nasdaq Composite and dress the table up nice. Drinks, appetizers. Maybe some crayons for the kids...
Chart watchers will see that the indicators (at least the ones that I rely upon) are getting "oversold" but have not quite rung that bell just yet. The Full Stochastics Oscillator is already screaming "Uncle", but Relative Strength, while weak... could take a few more days to get there. The daily MACD, while negative, is not really extended yet either.
What's that all mean? We're probably not that far off from another bear market rally. That said, trading this market is going to be like doing the booby trap course at Camp Lejeune at night. Stay low, move slow, and cover one eye if they pop a flare. No reason to get ahead of yourselves.
Russian President Vladimir Putin spoke on Tuesday. Putin said that peace talks with Ukraine are at a "dead end." He also referred to the civilian massacre at Bucha a "provocation" against Moscow, and said the military operation in Ukraine was going according to plan. Must be some plan that included the loss of eight general officers and battlefield defeats in each and every significant confrontation that involved the opposition's military forces instead of civilians.
The Pentagon will host the chief executives of the nation's eight largest defense contractors on Wednesday (today) to see what can be done about stepping up lethal support to Ukraine as well as replenishing US stocks. Lockheed Martin (LMT) , Raytheon Technologies (RTX) and L3 Harris Technologies (LHX) are known to be among the eight. We can guess who the other five are. The US has already provided Ukrainian forces with more than 5,000 Javelin anti-tank missiles, 1,400 Stinger anti-aircraft missiles, and hundreds of Switchblade drones.
The Javelin is a joint Lockheed/Raytheon project, the Stinger is a Raytheon product but is considered to be close to obsolete and has been in reduced production. The Switchblade is an AeroVironment (AVAV) product. The Center for Strategic and International Studies estimates that the US has supplied Ukraine with about one third of its total cache of Javelins and about one quarter of its total supply of Stingers. The Center also estimates that if the US were to supply Ukraine with no more aid (not happening)... that at current production rates, it would take three to four years to replenish US Javelin stocks and five years to replace the Stingers.
That said, not only will the US replenish its stocks, and not only will the US and the West continue to supply Ukraine, but demand for this kind of hardware is only going up globally, even as fiscal budgets and monetary policy tighten.
Economics (All Times Eastern)
08:30 - PPI (Mar): Expecting 10.5% y/y, Last 10.0% y/y.
08:30 - Core PPI (Mar): Expecting 8.4% y/y, Last 8.4% y/y.
10:30 - Oil Inventories (Weekly): Last +2.421M.
10:30 - Gasoline Stocks (Weekly): Last -2.041M.
13:00 - Thirty Year Bond Auction: $20B.
The Fed (All Times Eastern)
No public appearances scheduled.